SEC Buries the Lede About Stunning Misconduct in Its Office of the Ombudsman

September 19, 2022

When it comes to the regulation of Wall Street, apparently the SEC views its role as requiring a lot of self promotion -- as shown on its online "Press Releases" page A federal regulator has to keep the public informed about its work and if that involves a bit of tooting its own horn from time to time, I guess we can live with that. Just by way of example, here's the SEC's Press Releases page for the week before and the week after Monday, August 29, 2022:

Sept. 2, 2022: SEC Charges Venture Capital Adviser Energy Innovation Capital
Management for Overcharging Fees 2022-154
Aug. 30, 2022: SEC Charges Advisory Firm and Executives with Devising an Elaborate
Scheme to Defraud Clients out of More Than $75 Million 2022-153
Aug. 26, 2022: SEC Issues First Fee Rate Advisory for Fiscal Year 2023 2022-152
Aug. 26, 202:2 SEC Amends Whistleblower Rules to Incentivize Whistleblower
Tips 2022-151
Aug. 25, 2022: SEC Charges Infrastructure Company Granite Construction and Former Executive with Financial Reporting Fraud 2022-150
Aug. 25, 2022: SEC Adopts Pay Versus Performance Disclosure Rules 2022-149
Aug. 24, 2022: SEC Publishes Draft FY22-26 Strategic Plan for Public Comment

During the two week timeframe from August 22 to September 5, 2022 (nine business days plus Labor Day holiday), the SEC managed to post seven Press Releases. Three of the releases cited the federal regulator's charging of respondents with violations. One cited the mundane announcement of a rate advisory. One cited the amendment of the SEC's Whistleblower Rules. One cited disclosure rules. And, finally, one release cited the publication of a draft strategic plan. 

What you may have missed during that same August 22 to September 5th span was a posting on the SEC's Press Releases page about a very disturbing investigation of its former Ombudsman by the SEC's Office of Inspector General ("OIG"). Actually, you didn't miss anything. The SEC buried the lede on this in-house scandal.

On August 29, 2022, the SEC's OIG published a summary of an in-house investigation, which resulted in troubling findings and allegations about misconduct involving how the federal regulator handled its Tips, Complaints, and Referral ("TCR") program. Notwithstanding the dramatic nature of OIG's investigation and findings, the SEC failed to post anything about it on it Press Releases page; buried elsewhere on the SEC's website without much fanfare is "SEC Investigative Summary" (August 29, 2022) Here's the entire one-page posting as set forth at the above link:


Office of Inspector General

August 29, 2022 

Investigative Summary 

Findings Related to the Former SEC Ombudsman 

The U.S. Securities and Exchange Commission (SEC) Office of Inspector General (OIG) investigated anonymous allegations that the former SEC Ombudsman provided false statements to OIG auditors regarding the SEC's Tips, Complaints, and Referral (TCR) program, and that the former Ombudsman violated SEC Regulation (SECR) 3-2 (TCR Intake Policy) by failing to enter TCRs in accordance with SEC policy. 

We found that the former Ombudsman misrepresented facts in a written response to an OIG draft management letter related to TCR practices by the Office of the Ombudsman. The former Ombudsman's written response to the OIG letter was in direct contravention to what the former Ombudsman conveyed to the OIG during its engagement with the former Ombudsman on the TCR program, what we confirmed through TCR records, and what we learned from the Office of the Ombudsman's staff. Additionally, the former Ombudsman approved a spreadsheet provided to the OIG containing fourteen TCR entries that were purportedly entered by staff within the Office of the Ombudsman, which was inaccurate and misleading. We found that ten of the fourteen TCRs presented in the spreadsheet did not originate within the Office of the Ombudsman, were not related to Ombudsman matters, nor were they entered into the TCR system by Office of the Ombudsman staff. 

We also found that the former Ombudsman violated SECR 3-2 by failing to enter TCRs on investor matters received by the Office of the Ombudsman that warranted entry. Moreover, the former Ombudsman directed staff within the Office of the Ombudsman to refer investors to enter their own TCRs on matters related to alleged securities law violations or fraud, rather than entering the matters into the TCR system or forwarding the matters to a TCR point of contact, as SECR 3-2 requires. 

In SEC Investigative Summary (August 29, 2022), t
he SEC's Office of Inspector General ("OIG") found that the SEC's former Ombudsman/Office of the Ombudsman lied when responding to OIG about Form TCR practices. Further, the former Ombudsman was found to have approved the submission to OIG of an "inaccurate and misleading" spreadsheet, which falsely claimed that 10 of 14 TCRs originated from the Office of the Ombudsman, when, in fact, those matters did not originate from that office. Worse, OIG found that various matters referred to the Office of Ombudsman, which should prompted the generation of a Form TCR did not -- and investors with tips were essentially told to "enter their own TCRs." In jaw-dropping-fashion, OIG found that in 2017, 2018, 2019, and 2020 Annual Reports to Congress, the Ombudsman falsely depicted hypotheticals or composite descriptions as actual "vignettes." It was only in response to a notice from OIG that the Ombudsman remediated the characterization of the vignettes in the 2021 Annual Report.

The folks at OIG did their best to blunt the impact of their findings and allegations. What a clever bit of drafting to continue to blame everything on the "former Ombudsman." Amazingly, the online summary never names the name of the "former Ombudsman." That's somewhat odd considering the SEC had posted yet another Press Release several years ago: "Tracey L. McNeil Named as SEC's First Ombudsman" (SEC Press Release 2014-186 / September 5, 2014)" Inexplicably, in keeping its focus on the former SEC Ombudsman, OIG never blames the Office of the Ombudsman, or, for the matter, the apparent missing-in-action system of oversight and management at the highest levels of the Commission itself. 

What's set out in the OIG report is just another sordid example of piss-poor management whereby large government bureaucracies are run by folks who lack the ability to effectively manage their agencies. For much of 2017 to 2020, the SEC was chaired by Trump appointee Jay Clayton. Since April 17, 2021, the SEC has been chaired by Biden appointee Gary Gensler. So, if we're divvying up who gets blamed for what, Clayton is on the hook for the cited misconduct at the SEC from 2017 through 2020; and Gensler is on the hook since April 17, 2021. The allegations of misconduct at the SEC's Office of the Ombudsman from 2017 through 2020 are disconcerting enough, however, in 2022, we now wrestle with SEC Chair Gary Gensler's absolute lack of disclosure to Congress about OIG's investigative findings during his:

Amazin' ain't it? The SEC managed to post on its website two separate releases about Chair Gensler testimony -- the key distinction in the two release being between his mere "Testimony" and his "Oral Testimony." To be clear, there is not a single word in Chair Gensler's published September 15th testimonies before the Senate Committee about the troubling assertions in OIG's August 29th "Investigative Summary." Gensler's omission is all the more discomforting in light of the very pointed and specific finding by OIG that the former SEC Ombudsman had presented misleading vignettes in four Annual Reports to the Congress. As Bloomberg's John Holland so succinctly encapsulated the issue:

The SEC official charged with helping the public navigate the agency's complex system lied to investigators, added misleading information in reports to Congress, and didn't log hundreds of entries into the agency's tip program, according to the summary of an inspector general's report.
When I saw that the OIG had published a report lambasting the former SEC Ombudsman, I immediately recalled this SEC press release from a few months ago: "Inspector General Carl W. Hoecker to Retire from SEC" (SEC Release / April 27, 2022)
 Of course, when I recalled the retirement of former Inspector General Hoecker, I also recalled another SEC black eye: "U.S. SEC suspended internal watchdog for 7 days after misconduct finding-records" (Reuters by  Chris Prentice and Sarah N. Lynch / February 2, 2022) In part, the February 2022 Reuters story asserted that:

The government investigation into Hoecker was led from 2017 to 2019 by the Integrity Committee, a federal panel that examines allegations of wrongdoing against inspectors general, after two whistleblowers alleged that he conducted a substandard investigation. Inspectors general are government watchdogs who guard against the misuse of taxpayer dollars.

The previously unreported documents show that the SEC, which received the Integrity Committee's report on Hoecker in 2019, also concluded wrongdoing by Hoecker. He failed "to avoid the appearance of" bias and exercised "poor judgment when contacting a witness during an active investigation."

The SEC concluded that Hoecker failed "to report allegations of improper conduct pursuant to the SEC's policy of preventing harassment," according to the documents, which include Hoecker's time-sheets.

While the Integrity Committee recommended the SEC consider firing Hoecker, its Commissioners voted instead on May 8 to suspend him without pay from May 24-June 2, 2020, the records show. At the time, Hoecker earned nearly $277,000 a year.

So . . . let's see if we all got this. 

On August 29, 2022, the SEC's Office of Inspector General issued an "Investigative Summary," in which it found that the SEC's former Ombudsman lied to OIG's auditors and lied about her handling of tips from potential whistleblowers and lied in four years of annual reports submitted to Congress. Should we take the OIG investigation's findings with several large bags of salt because OIG itself was found to have been led by a now-former Inspector General, who the Integrity Committed recommend be fired (but, instead, the Commission merely suspended him without pay)? In its findings, the Integrity Committee found that OIG's Hoecker had failed to avoid the appearance of bias and exercised poor judgment when contacting a witness during an active investigation, and had failed to report allegations of improper conduct. Talk about the OIG pot calling the Ombudsman's kettle black! Irony piled on irony steeped in irony!

The recent revelations of SEC's incompetency, ineptitude, and misconduct are vindication for years of unanswered complaints that I filed with the SEC about the SEC's Whistleblower Program. Way back in 2014, I alerted the SEC to a number of troubling aspects of its Whistleblower Program: "Comment filed with SEC/ From: Bill Singer" (September 12, 2018) 
As I stated, in part, in my public comment:

[I]n November 2014, I filed a complaint with the SEC's Officer of Inspector General ("OIG") and requested an investigation of what I deemed OWB's dilatory conduct. In submitting my complaint, I was required to participate in a substantial telephone interview by the third-party service provider that the SEC retains for such purposes. During that interview, I provided the sum and substance of my complaint. I then awaited some meaningful follow-up. And I waited. And I still wait.

In my futile attempts to communicate with OIG, I have referenced the April 9th Blog article, which details my exasperation with both OWB and OIG. In response, OIG referred me back to OWB! Additionally, OIG persists in asking me to provide information that I had previously submitted -- but OIG will not acknowledge that it has either misplaced or lost that information and I will not cooperate further without such an admission or explanation to the contrary. Ten months have passed since the filing of my complaint with OIG and there has be no effort to contact me to discuss my concerns.

Keep in mind that my client was finally awarded about $1.6 million after the publication of the April 9th Blog. It's one thing to write me off as disgruntled because my client's claim was denied but it's quite another thing when you're trying to marginalize the grievances of someone who provided substantial assistance to the SEC and eventually gained a sizable award. The system is broken and needs to be fixed.

As to the source of the underlying facts raised in my 2018 SEC Comment above, they were set out in "SEC Whistleblower Program Is A Black Hole Of Despair" ( Blog, April 9, 2015) In my opening remarks in the April 2015 Blog, I noted that:

As part of my law practice, I represent whistleblowers, and for several years, I have been representing one such client before the Securities and Exchange Commission ("SEC") and dealing with the federal regulator's Office of the Whistleblower ("OWB"). Frankly, the experience has been incredibly frustrating. I simply cannot persuade the OWB that it needs to adjust its mind-set and understand that my client is not an adversary or a defendant/respondent in a criminal/regulatory case. If OWB's attitude doesn't change, it will undermine the SEC's Whistleblower Program and dissuade informants from coming forward and deter lawyers from representing those individuals on a contingency basis.

As a former regulator with two Wall Street self-regulatory organizations, I fully understand and respect the need for prosecutors and regulators to scrupulously maintain whatever confidentiality is mandated for investigations and trials/hearings. Since I represent individuals and entities that are often industry defendants/respondents and I also represent defrauded public customers, I am particularly vested in ensuring that the regulatory and criminal justice processes remain legal and ethical. I understand the rules of the game and I honor the rulebook. It is in that spirit that I urge the SEC to implement more deadlines within its Rule 21F. Also, I urge the SEC to investigate its Office of the Inspector General ("OIG") and determine whether the use of third-party service providers is appropriate for the intake of complaints directed to that office.

In 2014, I had filed a Complaint with OIG about the dilatory practices of the Office of the Whistleblower. What ensued was a despicable lack of professionalism from the SEC's various staff in handling the intake of the complaint and taking steps to investigate the allegations, as noted in the 2015 Blog: 

The OIG uses a curious process for the intake of complaints about the SEC and its divisions and staff. You can utilize an online filings system or a toll-free hotline telephone number. Apparently both are serviced by third-party service provider. I opted to file my grievance via telephone.  The telephone call in November 2014 was protracted, during which time I was asked a series of questions (likely from a script) and, in response, I provided names, dates, rules, and events in support of my complaint.  I know that OIG got the complaint because they provided me with a Report number and sent to me this email on November 20, 2014: . . .

. . .

Despite having cooperated fully with the intake procedures that OIG has implemented, it seems that OIG either lost, destroyed, or misplaced the notes of my November 2014 complaint. Inexplicably, in response to complaints about OWB's policies and practices, OIG waited four months before referring me back to OWB. . . .

By way of update, it's now September 2022 and I am still waiting for any meaningful follow-up from OIG to my 2014 complaint. 

For more background on the SEC's mismanagement of claims for Whistleblower Awards:

"Whistleblower Challenges SEC Over Delay on Award Decision / Tipsters have grown frustrated with the length of time it has taken the regulator to determine whether a tip warrants a reward" (Wall Street Journal by Kristin Broughton / April 30, 2019)

"SEC Whistleblower Payouts Slow Amid Deluge of Reward Seekers / Agency proposes ways to speed up decisions that now take more than two years to make" (Wall Street Journal by Dave Michaels / August 5, 2018)

"Whistleblowers Find SEC Rewards Slow and Scarce / The Securities and Exchange Commission offers financial rewards for information on wrongdoing. But many tipsters have found it tough to collect" (Wall Street Journal by Rachel Louise Ensign and Jean Eaglesham / May 25, 2015)

"SEC Backlog Delays Whistleblower Awards / Claimants are often kept waiting for a decision, data show" (Wall Street Journal by Rachel Louise Ensign and Jean Eaglesham / May 4, 2015)

Despite the ongoing failures of the SEC's Whistleblower Program, the unsettling findings about the SEC's former Ombudsman, and the troubling history of the SEC's former Inspector General, SEC Chair Gensler just didn't see the need to offer even a word about any of the aforementioned in his published Senate testimony. Moreover, the word "whistleblower" never even made it into the two published versions of Gensler's Senate testimony. What Chair Gensler did manage to work into his testimony was this:

While the Division is doing more with less, we do need more resources. For example, more cases are being litigated and going to trial. The SEC has tried the same number of cases to verdict in federal courts in FY22 (14) as we did in the prior three fiscal years combined.

Further, in FY21, we received 46,000 tips, complaints, and referrals from members of the public, up from about 16,000 five years earlier.

Doing more with less?  As in what the rest of us do every single day? Y'all understand the meaning of "inflation?" 

Gensler touts the SEC's 2022 trial-to-verdict docket of 14 cases as equaling the total for three prior years combined. Of course, a fairer disclosure might have allowed that those former three years of 2020, 2021, and 2022 spanned the Covid pandemic. You remember that, right? Folks didn't go to work. Courts were closed. Continuances and adjournments became the default. Life as we know it came to a standstill. 

Don't Go There: For those of you who want to argue that I'm politically biased against Chair Gensler or have some grudge against him, please recall my remarks as published in the February 12, 2021, "Securities Industry Commentator,"
, where I stated, in part, that:

Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers (SEC Release)

As and Securities Industry Commentator readers know, I detest the SEC's unprincipled history of sanctioning corporate fraudsters in one breath, and then, in the next breath, granting them exemptions from "Bad Boy" provisions. In recent months, when asked about who I would like to see installed as the next SEC Chair, my list of candidates tended to include Preet Bharara, Gary Gensler, and Kara Stein. As such, I welcomed Gensler's selection. That being said, former SEC Commissioner Kara Stein would have been a wonderful choice because of her staunch opposition to the SEC's policy of granting knee-jerk-like exemptions to a slew of corporate miscreants . . .

Finally, as to Gensler noting in his Senate testimony that the SEC received "46,000 tips, complaints, and referrals," one has to wonder about the impact of the former Ombudsman's mishandling of tips, complaints, and referrals on that number. Oh, and let's not forget the Office of the Whistleblower's own management issues negatively impacted those numbers. And perhaps we might speculate as to whether a wave of appeals will soon flood the federal courts when folks who were denied SEC Whistleblower Awards digest the OIG report.